A Chinese stock market crash may have clouded the picture in terms of SSA issuance in US dollars, but a strong bid for euros and core European names will give some issuers heart, said bankers covering public sector debt.
Finland, for example, could well find a flight-to-quality bid if it goes ahead with a strongly rumoured 10-year benchmark euro bond this week, said three SSA syndicate bankers.
European government bond markets opened Monday on the front foot thanks to a safe-haven bid as a result the equity market turmoil: 10-year German Bund yields, for example, fell 2bp in early trading to 0.54%, according to Tradeweb. This is against the backdrop of a strong rally for the single currency on Monday morning, going through May levels of 1.1468 versus the US dollar.
“Finland will be alright if they decide to go ahead. The euro market has remained more resilient than others to the weakness, and Finland trades almost always go well,” said one of the bankers.
“They don’t usually look for a huge size so don’t need as much; though this could work both ways, as it can lead to some concerns about liquidity,” he said.
In recent years, Finland has raised a maximum of €4bn from a benchmark trade.
The sovereign’s outstanding 10-year benchmark, a July 2025 note, was steady at a bid yield of 0.76% at midday London time, according to Tradeweb.
Outside of Finland and the euro market, though, the outlook is blurred.
“I think it’s too much to say that the events in China preclude any SSA issuance, but it has definitely added some uncertainty,” said a second SSA syndicate official.
“We will have to wait to see how New York opens. I get the feeling we need a bit of stability before coming to market. You don’t want to be issuing into a widening market,” he said.
SSA issuers are on the prowl for US dollar benchmark deals, and many were slated to come this week ahead of speculation over a potential rate hike by the US Federal Reserve.
The pipeline includes Finnish agency Municipality Finance, the European Investment Bank, Austrian agency OeKB and Dutch agency Nederlandse Waterschapsbank. The latter issuer has an outstanding mandate for a 10-year Green bond, having hired HSBC and SEB for a potential deal earlier this year.
All of these issuers are keen to get their deals done as early as possible; September could be a volatile month on the US dollar side, as the possible rate hike means the market will be scrutinising first the non-farm payroll number and then the FOMC minutes mid-month.
The problem is that there have been some signs of weakness, not just on Monday morning, but also towards the end of last week.
“We saw KommuneKredit and ADB get good deals done at the start of the week. And then with IDB we saw the first signs of a slightly weaker market – they just about got the size they wanted – and then SEK struggled to get across the line at what looked like a very cheap level,” said another SSA banker.
“With everything else going on in the market currently, it doesn’t feel like an obvious environment in which to be throwing deals at the market. But it is still early in the week, and we will have to see,” he said.
Great fall of China sinks world stocks, dollar tumbles - RTRS
Alarm bells rang across world markets on Monday as a 9% dive in Chinese shares and a sharp drop in the dollar and major commodities panicked investors, Reuters reported.
European stocks opened more than 3% in the red after their Asian counterparts slumped to three-year lows as a three month-long rout in Chinese equities threatened to get out of hand.
Safe-haven government bonds and the yen and the euro rallied as widespread fears of a China-led global economic slowdown and currency war kicked in.
“It is a China driven macro panic,” said Didier Duret, chief investment officer at ABN AMRO. “Volatility will persist until we see better data there or strong policy action through forceful monetary easing.”
With serious doubts now emerging about the likelihood of a US interest rate rise this year, the dollar slid against other major currencies. It was last at 120.25 yen, its lowest in three months.
The Australian dollar fell to six-year lows and many emerging market currencies also plunged, whilst the frantic dash to safety pushed the euro to a 6-1/2-month high.
“Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable,” said Takako Masai, head of research at Shinsei Bank in Tokyo.
Commodity markets took a fresh battering. Brent and U.S. crude oil futures hit 6-1/2-year lows as concerns about a global supply glut added to worries over potentially weaker demand from China.
US crude was down 3% at US$39.20 a barrel while Brent lost 2.4% to US$44.40 a barrel.
Copper, seen as a barometer of global industrial demand, tumbled 2.5%, with three-month copper on the London Metal Exchange hitting a six-year low of US$4,920 a tonne. Nickel slid 4.6% to its lowest since 2009 at US$9,730 a tonne.
